Is Austerity About To Hit The EU?

The leaders of the EU have been coming and going all day for
their “confessionals” with the monk-like president of the
European Council, Herman
Van Rompuy.

They have been telling him what they can and cannot concede in
their latest contest over the EU’s trillion-euro budget for the
next seven years.

After a long delay, the presidents and prime ministers finally
sat down for their first full session close to midnight.

Mr Van Rompuy told them: "Maybe this meeting will be long and
complicated. Fortunately this issue only comes up every seven
years!"

At about 1% of the EU’s GDP, the union’s budget is minor compared
with total public spending (about 50% of GDP). But the budget
debate brings out the worst in leaders, turning the negotiation
into the nastiest of zero-sum (Reuters
has a useful guide here
here).

This haggling session is particularly charged because it takes
place against the background of the crisis of the euro zone, and
the prospect that Britain might detach itself from the EU. In the
tug of war, Britain stands at the most austere end of the rope,
while the European Parliament is at the most profligate. Both
have threatened to veto a budget that does not meet their
demands.

The European Commission has proposed a budget that, at €1.09
trillion for 2014-2020, is about 5.5% bigger than the one for the
previous seven-year period ending in 2013 - when calculated in
real terms, and taking account of all items that are both in the
official Multi-annual Financial Framework (MFF). The chart above
sets out the details.

The proposed budget irritates net contributors. The commission
claims the money is needed, in part, because the EU has extra
functions, such as its new diplomatic arm (the European External
Action Service) and in part because new members have joined since
the last budget was drawn up (Romania and Bulgaria in 2007, and
Croatia next year).

Spending on the two big-ticket items – subsidies to farmers (part
of “Natural Resources” in the chart) and cohesion funds for
poorer parts of Europe (part of “Smart and Inclusive Growth”),
which together account for about 80% of the budget – was squeezed
in real terms. The aim was to make space for more “modern” areas
of spending, including research-and-development, and the
Connecting Europe Facility (CEF), a programme to promote
cross-border infrastructure (energy, transport and broadband).

This is precisely the sort of thing that the EU should be
concentrating its resources on, were it to be reinvented (see my
column "Coming off the Rails"
here). It would increase EU spending on infrastructure
more than three-fold to €50 billion. Even so, it is modest when
compared with €379 billion for cohesion and €283 billion for
direct agricultural subsidies (see ,my column this week, "Milking
the budget",
here). But the CEF has few champions, except for the weakened
commission, and makes a tempting target for leaders as
their old priorities re-assert themselves.

The overall budget was trimmed by €50 billion by Cyprus, which
holds the rotating presidency of EU ministerial meetings, and
then by a further €24.5 billion by Mr Van Rompuy, who took over
the negotiations. He presented a new compromise proposal over a
dinner of cold dishes and salads - plainly no leaders wants to be
seen feasting while applying the knife to EU support for (some)
hard-pressed farmers and poorer regions. It is roughly the same
size, but tries to shove more money into agriculture and cohesion
(but makes no change to the administration budget)

As leaders broke up for the night, they were likely to be
bargaining well into the weekend. The unusually crowded press
room prepared for yet another long summit. Journalists passed the
time in a quest on Twitter
for the most appropriate summit song (#eucoplaylist). Favourites
include Pink Floyd’s “Money”, Simply Red’s “Money’s Too Tight to
Mention” and Talking Heads’ “Road to Nowhere”. Below is the view
from some of the key countries.

Britain:

First in this morning was David
Cameron, the British prime minister. He is the most hardline
of the fiscal hawks, demanding a real-terms budget freeze (based
on spending in 2011). But that has not enough to stop
backbenchers inflicting a defeat on the government in a
(non-binding) resolution demanding actual cuts.

An even bigger priority is to defend the British rebate. Tony
Blair had conceded part of it in the name of helping the new
members from eastern Europe. And Mr Van Rompuy has niftily
suggested a new way of “paying” for the British rebate with
contributions from all countries, including the British
themselves, as a means of eroding the refund. But Mr Cameron
knows he cannot survive any concession to the rebate won by
Margaret Thatcher in 1984.

In Brussels many wonder whether Mr Cameron can agree to any
likely compromise. If he vetoes the budget and becomes isolated,
might Britain enter a cycle of confrontation that ends with it
leaving the club? (see my column, “Europe's British problem",
here). Asked if EU leaders would be able to keep Britain
aboard, Jean-Claude Juncker, Luxembourg’s veteran prime minister,
quipped: “The British know how to swim.”

Mr Cameron’s tone has changed of late. In his view Mr Van
Rompuy’s proposal now goes in the “right direction”, but still
leaves too much fat. Though the British traditionally complain
loudest about the fossilised nature of EU spending, they too are
taking aim at the hapless CEF.

Mr Cameron is also taking potshots at the hated Eurocrats. What
about shaving some €6 billion from the administration budget, he
suggested, by cutting Eurocrats’ salaries by 10%, raising their
pension age to 68 and capping their pensions at 60% of their
salaries rather than 70%?

The Commission shot back with ready briefing notes: under its
proposals EU staff numbers are already being cut, working hours
are rising and the retirement age is being pushed up. On most of
these measures, says the commission, Eurocrats fare worse than
the British civil service, whose most senior officials earn
substantially more than EU ones.

For all the tough talking from Britain, it is using a different
unit of reckoning from just about everybody else. The EU budget,
based on the French model, uses two sets of numbers:
“commitments” and a slightly lower figure for “payments”. The
British insistence on using payments sound tougher, but it also
provides some wriggle room if the gap between payments and
commitments is stretched a bit.

France (from S.P in Paris)

France’s President François Hollande went into the summit with
one over-riding objective: to protect as far as possible the
Common Agricultural Policy (CAP). In some ways, this might seem
surprising from a Socialist government. The party is run by
urbane Parisian types; the rural world is largely conservative;
and the biggest beneficiaries of agricultural support are the
country’s big wealthy farmers.

Yet many members of government are also elected in rural bits of
France. Pierre Moscovici, the finance minister, for instance, is
deputy for Doubs, in the Jura of eastern France. And even if only
a tiny fraction of the population still works in farming, links
to rural life, through food, fresh markets and terroir,
have a strong hold on the French imagination. No serious French
presidential candidate would miss a visit to the annual Paris
agricultural show so as to be pictured stroking a cow’s bottom.
Mr Hollande set a new record by spending 12 hours there earlier
this year.

Defending the CAP is a popular and cross-party concern, as is any
form of European Union spending at a time of recession, and the
French are determined to keep cuts to a minimum. Even though
France is becoming a net contributor to the CAP, agriculture is
still the domain where France earns the greatest
retour from the EU budget. Jean-Marc Ayrault, the
prime minister, has called Mr Van Rompuy’s proposal to reduce the
CAP budget by nearly €50 billion over the seven-year period
“unacceptable”.

The French argue that farm support is about not just subsidies
but guaranteeing food security and quality in Europe.

As the second-biggest gross contributor to the EU budget, the
French will use the traditional bargaining chip of the British
rebate to try to fight CAP cuts. Mr Hollande sounded a warning
note this week a few days ahead of the summit by denouncing those
countries that “come to collect their cheque, their rebate, their
refund”.

France’s difficulty this time, however, is that the president
goes into the negotiation without having secured a deal with the
German chancellor, as a former French president, Jacques Chirac,
managed to do ahead of budget talks in 2003. Instead, in a bid to
win support, Mr Hollande unusually went to Poland this week,
carrying the message that agriculture should not be at the
expense of cohesion funds; rather they should be on a par.

Poland (from K.T. in Warsaw)

As the biggest net recipient of EU funds, Poland’s priority has
been to defend cohesion funds that are used to help poorer
regions catch up with the rest of the EU. It has taken up a
leadership role in the so-called “Friends of Cohesion”. And the
fact that its economy is growing gives it new political clout –
not least in Germany. In the process, though, it has parted ways
with Britain, until recently Poland's close ally on issues such
as defence, the free market and national sovereignty.

Poland has long been at odds with France, though it is now being
wooed by Mr Hollande. During the time of President Nicolas
Sarkozy, the Poles feared being shut out of an elite club of
euro-zone nations that he was keen on creating. But Mr Hollande
sought to assuage such fears by supporting the idea of Poland’s
“associate membership” of the euro zone. Mr Hollande also brought
30 French corporate bosses with him

Poland uses the free-floating zloty, but says it is committed to
joining the euro. President Bronislaw Komorowski said Poland
should be ready for euro membership within three years. Whether
the Polish people want it is another matter.

Germany (from A.K in Berlin)

As always, all eyes are on the German chancellor, Angela
Merkel. As the biggest country in the EU, and its biggest
paymaster, any compromise will revolve around Mrs Merkel’s
ability to balance her belief in fiscal discipline with the need
to placate key allies.

The summit coincided with the annual debate about Germany's own
budget in the Bundestag, the lower house of parliament. Even in
normal times, this is an occasion for the opposition to mock and
harangue the government. But this time the
chancellor-candidate of the Social Democratic Party (SPD), Peer
Steinbrück, who is trying to recover from recent controversy
about the speaking fees he has been earning on the side, went in
with full-bore assault on another aspect of EU policy: the
(third) rescue of Greece (see my blog post here), which has not
yet been settled by finance ministers.

Mr Steinbrück said the chancellor must start to “be honest” about
what German taxpayers can expect in bailing out Greece. The
implication is that she has been deceiving German voters. He also
threatened that the SPD might withdraw support for Mrs Merkel’s
policies. This has more than rhetorical significance, because it
is only with the votes of the SPD and another opposition party,
the Greens, that Mrs Merkel was able to pass the main rescue
efforts this year - the creation of the permanent rescue fund
known as the European Stability Mechanism, and passage of the
“fiscal compact”, a treaty on budget discipline. “If we feel
deceived,” he thundered in her direction, “we will no longer bail
you out when you need our support.”

This may not make an immediate difference in Ms Merkel’s
negotiations on the EU budget. Germany is firmly in the camp of
the net contributors, looking askance at Gallic tolerance of high
spending. Mrs Merkel is said to have demanded another €30 billion
worth of cuts in addition to Mr Van Rompuy’s proposal – a
position opposed by France.

Rainer Brüderle, the parliamentary leader of her junior coalition
ally, the liberal Free Democratic Party (FDP), sent Mrs Merkel
off to Brussels with the quip that “every time I’m in Brussels, I
get the feeling that they have an awful lot of personnel.”
German officials say the summit is unlikely to find agreement,
and that another one may have to be held in March. But as
Germany’s campaign for next autumn’s general election heats up,
Mrs Merkel will have less room to manoeuvre – which might make a
deal even harder to find.

Sweden (from K.L. in Stockholm)

One of EU's net contributors and a strong critic of the latest
budget proposal, Sweden is the closest Mr Cameron has to a real
ally. It wants to see a smaller budget overall. Like
Britain, Sweden is also fighting fiercely to keep its rebate (a
proposed cut by Mr Van Rompuy was deemed “provocative”). But
unlike Britain Sweden is concerned with how the money is spent
within the budget. It wants less money dedicated to agricultural
subsidies, and a bigger share of cohesion funds to be directed to
the EU's poorest countries. And to boost the EU's
competitiveness, Sweden wants more spending on innovation and
research.

Italy (from J.H. in Rome)

The budget summit comes at an awkward moment for Italy’s
technocratic prime minister, Mario Monti. He is a staunch
pro-European (he is a veteran of the European Commission and
still has a home in Brussels). But polls suggest that Italians,
while generally keen on the EU, are profoundly disillusioned with
the euro and sceptical of the benefits that membership of the
union has brought them.

Italy, moreover, has quietly become the EU’s biggest net
contributor (as a share of economic output), and it stands to
lose more from proposed cuts to both farm aid and cohesion funds.

This may explain why his government has threatened to veto a deal
if it includes deep cuts to the subsidies provided to Italian
farmers. With a general election looming – March 10th
is now the most likely date – Italy’s prime minister may well
prefer a postponement to a compromise that would put him under
pressure from Italy’s vociferous and influential farming lobby.